- When you buy options, you have right to buy or sell underlying instrument (stocks, bonds, futures and FX).
- If you hold a long position or buy an option, you simply have a choice to buy and sell the underlying product but not obligated to do so.
- When you hold a short position/sell options and got exercised, you are obligated/forced to deliver (call) or take delivery (puts) of the underlying asset at the strike price no matter what the current market price is.
This refers to as a naked position blow-up. - Options are only worth something for a particular period of time.
After the date of expiration, your right to buy and sell the asset will terminated.
This due to time decay.
You can learn more about this with options theta. - An position is debit to the buyer when bought.
- An position when sold gives credit to the seller.
- Options are not available on every stock listed (only those traded on AMEX and NYMEX).
In the US, there are more than optionable 3,000 stocks, exchange-traded funds (ETFs) and indices. - 1 options contract controls 100 stocks/shares of the underlying asset.
- Options are not available on every penny move of the asset but only on several strike prices representing the price of the product.
- The money spent or collected on an option is called option premium .
Its value is determined by many factors such as implied volatility, time to expiration, relative strike price to stock price and type of option.
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